Monday's Milestone Market: Dow 11,000 Anyone?

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Includes: DIA, IVV, IWB, IWM, IWV, NYC, QQQ, SPY
by: Philip Davis

Click to enlargeYay - Greece is solved (again)!

Certainly this has to (again) be the catalyst that (again) gets us over 11,000 this morning. Perhaps if this doesn’t do the trick the Fed can come out with a statement that they will be leaving monetary policy at free for another 6 months (again) or perhaps Obama can say he thinks we should put more Americans to work (again) or perhaps some of the Gang of 12 analysts can come out with even bigger earnings estimates (again).

So many great ways to get us over 11,000 and it’s not even technical resistance - just psychological - so what’s the problem?

In last year’s fourth quarter, companies in the S&P 500 posted 17% profit gains overall, Thomson says. That excludes financial companies, whose gains were skewed that quarter because many had posted losses or tiny profits a year earlier. For the quarter that just ended, analysts are forecasting 27% gains, again excluding financial companies. Including financial companies, the forecast is 37%. "Earnings expectations are high enough to make it just too hard for a lot of companies to live up to them," worries Justin Walters of Bespoke. "We believe the market is more likely to struggle early on in earnings season than make a big move higher," Mr. Walters wrote to clients last week.

Goldman Sachs noted in their Global Markets Daily that America’s huge Q4 GDP growth was heavily influenced by a U.S.-wide inventory re-stock from overly defensive levels, which may lead to a global growth slow-down as inventories level out. Goldman’s April 6th note said:

Meanwhile, the momentum in the advanced economies was very strong in March as PMIs generally surprised on the upside. However, production in the advanced economies has been playing catch-up with the inventory cycle, as we continue to point out. This driver is temporary, and as mentioned above, the underlying data show that this cycle is coming closer to an end. The jump up in PMIs this month coincided with a large jump up in inventory indices, particularly in the US. As the inventory pendulum begins to swing the other way, industrial momentum may begin to slow.

Our Global Leading Indicator (GLI), released last weak, also confirms this story. While the headline measure improved, pointing to a solid industrial picture, the components generally show that momentum has been slowing. The PMIs are telling us a similar story.

I’ve been warning for quite some time that you can’t extrapolate an economic rebound from a rebuilding of inventories from record lows back to just "low." There is a long-standing economic assumption that "if the manufacturer builds it, then the consumer will come" which is just more of that "efficient market" nonsense that assumes the manufacturer wouldn’t be building things the retailer didn’t order and the retailer wouldn’t be ordering things the consumer wasn’t lining up to buy but I can’t help thinking that these manufacturers included Barzel, GM, Pacific Energy Proliance and Visteon and those retailers included Circuit City, Eddie Bauer, Filene’s, Fortunoff, Movie Gallery, Ritz Cameras, Samsonite and the other 249 publicly traded corporations that went bankrupt last year.

By the way, if you look over that linked list, you’ll notice 6 bankruptcies in the gaming industry plus Midway Games, who supplied equipment. Last week the casino stocks went up on good comps and, much like retail, it’s once again a case of extrapolating numbers off the improvement from the worst quarter since the Great Depression in an environment where, between bankruptcies and consolidation, almost 10% of the competition is gone. The reason I think "THEY" are gaming the markets is because I don’t see how "THEY" can be so blind as to actually believe the hype from the MSM, therefore "THEY" must have an ulterior motive in pushing the markets higher other than really wanting to hold FCX at $85 or AMZN at $140 with their soon-to-be $99 Kindle.

But enough negativity! I have resolved to "go with the flow" after this week and if that flow takes us over 11,000, then like a boat that is rising in a flood of sewage - we’ll hold our nose and ride the tide higher because we sure don’t want to be left at the bottom. That’s about my level of enthusiasm for playing the markets up here but at least we have lots of lovely round numbers to key off of and we’ll have a very clear indication if support breaks at our target levels of Dow 11,000, S&P 500 1,200, Nasdaq 2,500, NYSE 7,500 and Russell 700 - but let’s try to actually make it there first before we start playing above the line!

We at Phil's Stock World have been patiently (cough, cough) waiting since March 19th, when we went to cash, for Dow 11,000 to be held for just a single day. We came close on Friday at 10,997 thanks to that amazing (cough, cough) 40-point run into Friday’s close but close gets you no cigar in the markets and, sadly, the additional 50-point run in the futures after Friday’s close has already been reversed this morning (8:30) with oil leading the way down, all the way back to Friday’s pre-pump low of $84.15. I know, I said I was going to go with the flow - but what if the flow is down? I loved Mike Panzer’s post this weekend listing how things have been "Bullish, No Matter What" and that neatly sums up the past 60 days of trading - it’s up to earnings now to make or break this trend….

As I noted to Members last month, Hedge Funds are buying equities at the fastest pace since 2007 with financials the primary target. Are they making smart, long-term investments or were they trying to jack up the markets in order to entice investors to chase Q1 results? At the same time, Hedge Fund managers and other large NYMEX speculators have boosted their net long positions for gasoline to a new record last week, according to the U.S. Commodity Futures Trading Commission. Wagers that prices will rise outnumbered bets they will fall by 78,541 in the week ended April 6, according to the commission’s Commitments of Traders report April 9. That’s the largest number since the CFTC began to compile data for the contract in 2006 and a 7.1 percent gain from the week before. Speculators also added to their long positions for crude oil and heating oil.

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[MilesDrivenYoYJan2010.jpg]Click to enlarge

Gasoline is “a seasonal play this time of year and gets the attention and an increased amount of trading capital,” said John Kilduff, a partner at Round Earth Capital, a New York-based hedge fund that focuses on food and energy commodities. “Given the low refinery run rates, it makes sense that there would be speculative length in gasoline. Demand should be picking up.” It should be, but it isn’t (see chart above) as US Vehicle Miles driven is heading back to recessionary levels.

The Hang Seng fell 250 points in this morning’s trading but, fortunately, they gapped up 180 points at the open so they finished the day only down 70, back at 22,150. The Shanghai follwed a similar pattern, also down half a point on the day but the Nikkei had such a tremendous boost in pre-market trading (100 points) and another 50 points at the open that their 100 point dive in the afternoon still left them up 47 for the day - isn’t that great? Blame Thailand for Asia’s fall today as 21 people died and 858 protesters were injured in the election fallout. The country’s credit rating fundamentals are “darkening” amid escalating political protests, Moody’s Investors Service said on April 9. Moody's is concerned that worsening unrest will impair the effectiveness of government policies aimed at helping the economy recover from the global recession, he said.

Europe is also down sharply from their big, fat Greek open, possibly because economists at 25% of the Gang of 12 (GS, HBC and MS) each "coincidentally" decided to say that the Greek aid package would do little to boost economic growth. On the bright side, gang member UBS posted their highest quarterly earning in 3 years, mainly on huge profits from their debt trading unit as the on-again, off again Greek crisis has been booking record profits for the gang members that are ahead of the news (or making the news) with their trading.

We begin earnings season this evening with Alcoa (NYSE:AA) and we’ll just have to sit back and see how today’s trading goes. Will we hold 11,000 today or will it really be up to our US coprorations to put up or, finally, shut up?